With a multitude of manufacturing and mining industries operating in South Africa, our environment is suffering under the strain of increasing carbon emissions, known to promote harmful climate change. Through the impact of climate change on water, food prices, health, infrastructure, agriculture, disasters, and conflicts, South Africans were already fitting the bill for these emissions.

For this reason, South Africa ratified the Paris Agreement in November 2016 with specific goals to curb greenhouse gas emissions by 34% by 2020, and 42% by 2025, for the betterment of our environment and economy.

South Africa’s Carbon Tax Act became effective in June 2019 with markers, review timelines, and implementation deadlines to make these goals possible. The act is also a means to shift the financial responsibility for effects caused by harmful emissions to the polluters. A carbon tax is widely accepted by world economists as a cost-effective and economically efficient mechanism for achieving the improvement we require to achieve a low-carbon economy.

What is a carbon tax?

A carbon tax is levied on carbon emissions above a specific threshold and payable to the state by manufacturers as a form of excise tax. The more carbon gasses a company emits, the more tax it must pay.  This ensures the cost of managing environmental damage due to carbon emissions falls proportionately on the entities responsible for creating the emissions and simultaneously encourages greener manufacturing methods.

If a company works to reduce its emissions or is by nature a low-carbon organisation, its carbon tax bill will be less, or even zero providing it emits below the threshold.

Fitting global demand for ecologically aware industry

As international industry shifts towards a lower-carbon economy, South Africa risks losing our export markets if we don’t actively pursue lower carbon emissions. High-carbon exports produced in South Africa, like thermal coal, iron, steel, and combustion engines, happen to be some of our most profitable exports. Operating these industries according to a global standard is therefore essential to our economy.

Numerous economic studies have demonstrated that the cost of early efforts to reduce the causes of climate change considerably outweighs the eventual cost of failing to act.

South Africa as a low carbon economy

Manufacturers within the South African economy have the following to consider regarding carbon tax and reducing their harmful emissions:

• Innovation to reduce emissions by re-thinking the production process, or the product itself, is an initial expense, but a good investment in terms of avoiding future carbon tax payments.
• Embracing new technologies, sustainable product solutions, and environmentally conscious services puts companies at a relative advantage compared to heavy emitters in terms of marketing to an increasingly green-conscious market.
• Investors, lenders, and consumers will start to find lower-carbon options relatively more attractive because they are subject to less tax.
• The carbon tax paid can be absorbed by companies as reduced profit, or added to the price they charge customers. Because customers tend to choose cheaper goods, both alternatives translate to a lower income and losing out on clients who actively seek out environmentally friendly goods and services.

Minimising carbon tax payable using greener manufacturing therefore not only has environmental benefit but is also crucial to the financial interest of South African industry.

Who is liable for paying carbon tax?

Any entity registered in South Africa whose manufacturing and general running entails GHG (greenhouse gas) emissions above the predetermined threshold.

The predominant GHG types are:

• CO2 (carbon dioxide): typically from fuel combustion activities
• CH4 (methane): typically from waste and mining activities
• N2O (nitrous oxide): predominantly from agricultural activities
• HFCs (hydrofluorocarbons): used as refrigerants to replace the ozone-damaging CFCs
• PFCs (perfluorocarbons): typically generated in the manufacturing of electronics
• SF6 (sulphur hexa fluoride): also associated with the electronics industry

Determining the taxable volumes of these and other harmful gasses emitted must be done according to guidelines set out by the DEFF (Department of Environment, Forestry and Fisheries). Carbon emission volumes can be declared according to standard values as pre-defined by the DEFF, (referring to Section 4.1 of the Carbon Tax Act), or according to the tax-paying entity’s own determinations (referring to Section 4.2 of the Carbon Tax Act).

The DEFF has published guidelines for both instances which can be found here.

Ensuring compliance with the Carbon Tax Act

Registration

Companies that produce taxable emissions are required to register each contributing premises as an Excise Manufacturing Warehouse according to SARS regulations and also register as a carbon taxpayer.

Annual returns and audits

Emissions must be declared annually by filing returns by SARS deadlines. Note, that the Carbon Tax Act makes allowances which, when taken into consideration, can result in a lowering of the carbon tax a company is liable for. These are applicable according to the relevant sector of industry and emission type and include:

• Basic tax-free allowance (Section 7 of the Act)
• Allowance for industrial process emissions (Section 8 of the Act)
• Allowance in respect of fugitive emissions (Section 9 of the Act)
• Trade exposure allowance (Section 10 of the Act)
• Performance allowance (Section 11 of the Act)
• Carbon budget allowance (Section 12 of the Act)
• Offset allowance (Section 13 of the Act)

Taxpayers who are licensed for carbon tax may claim their relevant allowances when they submit their complete annual carbon tax account. As part of the processing of these accounts, SARS may subsequently request supporting documents from taxpayers who benefit from allowances as a means of verifying compliance.

Carbon tax returns can be filed via the eFiling platform and require completing a DA180/EXD180 report.

A registered carbon tax-paying entity is automatically subject to auditing by both the DEFF and SARS. These audits are done to ensure calculations shown in annual returns are done correctly and according to formulas specified in the regulations (desk audits), and to ensure the entity’s returns are a true representation of their practical emissions (compliance audit). A compliance audit would require access to the entity’s premises and accounts.

Need to ensure your company is SARS Customs and Excise compliant? It can get tricky, so let us handle the paperwork, applications, and registrations on your behalf. Our knowledgeable consultants are just a phone call away and ready to assist.